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European Sustainability Reporting Standards, EU criteria defined

On 31 July 2023, the European Commission adopted the regulation supplementing the Accountability Directive 2013/34/EU with the European Sustainability Reporting Standard (ESRS), i.e. the sustainability reporting principles of companies in the EU. (1)

1) European Sustainability Reporting Standard, ESRS. The new obligations

The European Commission, as provided in the Corporate Sustainability Reporting Directive (EU) No 2022/2464, (2) adopted the first set of European Sustainability Reporting Standard (ESRS). Which must be followed - for reporting on sustainability, in a specific section of the financial statements - starting from the following dates:

- 1.1.2024 (budget 2025), for companies already subject to the obligations of Non-Financial Reporting Directive (NFRD) 2014/95/EU. (3) Large listed companies, banks and insurance companies with more than 500 employees, non-EU listed companies with more than 500 employees and branches in EU,
- 1.1.2025 (2026 budget), for other large companies,
- 1.1.2026 (2027 financial statements), for small and medium-sized listed companies. With the right to postpone the reporting to 1.1.2028 (2029 budget),
- 1.1.2028 (2029 financial statements), for non-EU companies with annual revenue > €150 million and a branch in the EU with turnover > €40 million.

2) Required information

Businesses will have to communicate information on the short, medium and long-term impacts, risks and opportunities relating to environmental, social and governance. And thus describe:

– the business model and strategy in relation to sustainability issues, including risks and opportunities, financial and investment plans,

– the objectives related to sustainability issues and the timing for their achievement,

– the role and responsibilities of the administrative, management and control bodies in relation to sustainability issues,

– company policies,

– any incentive schemes related to sustainability issues,

– the procedures of due diligence applied by the company in relation to sustainability issues,

– the main negative impacts related to the value chain and any actions taken to prevent or mitigate these negative impacts,

– the main risks associated with sustainability issues and how to manage these risks,

– the relevant indicators for the communication of the requested information (CSRD, article 19.2).

3) Sustainability reporting standards

The new regulation describes in Annex I the European Sustainability Reporting Standard (ESRS), divided into three categories of information:

3.1) Transversal standards

All businesses subject to Corporate Sustainability Reporting Director (CSRD), regardless of the sector in which they operate, must comply with the standards relating to:

- 'general prescriptions' (ESRS 1), as regards the methods of presentation of the information, e

- 'General information' (ESRS 2). The information must be articulated in Governance (GOV), Strategy (SBM), Impact, risk and opportunity management (IRO), Metrics and targets (MT).

3.2) Thematic standards (ESG)

The three ESG criteria (environmental, social, governance) – the reporting of which is mandatory for all companies in every sector – are the subject of as many thematic standards, which are in turn structured as follows.

Environmental. There are five environmental standards:

– climate change (ESRS E1),
– pollution (ESRS E2),
– water and marine resources (ESRS E3),
– biodiversity and ecosystems (ESRS E4),
– use of resources and circular economy (ESRS E5).

Social . The four social standards concern:

– own workforce (ESRS S1),
– workers in the value chain (ESRS S2),
– affected communities (ESRS S3),
– consumers and end users (ESRS S4).

Governance. Information on a single standard is currently foreseen:

– business conduct (ESRS G1).

3.3) Industry standards

Industry Standards they are also intended to consider substantial impacts, risks and opportunities, in their respective areas, which are not covered by the thematic standards.

4) Reporting criteria

Reporting and communication Sustainability standards must respect some fundamental qualitative characteristics. Relevance of information, faithful representation of reality and 'exciting' qualitative characteristics, with attention to their verifiability, comprehensibility, comparability (Annex I, Appendix B).

Where a business considers that a material impact, risk or opportunity for your organization does not fit into the three categories of standards (cross-cutting, thematic and industry), it provides additional specific information to enable stakeholders to understand these impacts, risks or opportunities. (4)

5) Definitions

All sustainability standards are based on the concepts of impact, risk and opportunity, defined as follows:

- For 'impacts' means the impacts related to sustainability - positive and negative, current and potential - related to the company's activity, to be identified and assessed in terms of relevance,

- For 'risks and opportunities' means the company's financial risks and opportunities related to sustainability, including those deriving from dependence on natural, human and social resources. To be identified through a financial relevance assessment process. (5)

6) 'Double relevance'

The concepts listed above are essential when the company must evaluate the relevance of information and thus decide whether this information should be disclosed. With a view to reducing the burdens on operators (see infra, paragraph 7), the Commission has in fact decided to entrust the companies themselves with the choice of which information to communicate, in addition to the always obligatory 'general information'.

The information to be communicated are therefore those that satisfy the 'double relevance', of impact and financial. A non-binding flowchart, in Appendix E to Annex 1, can help companies evaluate the relevance of the information to be published. If an entity fails to disclose all or part of the disclosure requirements, it must provide an explanation of the conclusions that led it to consider the matter immaterial.

7) Simplifications

The European Commission made use of the advice of EFRAG (European Financial Reporting Advisory Group) to define the content of the standards. Following the consultation of stakeholders, EFRAG introduced a number of simplifications which were further expanded by the Commission.

In addition to the transfer of the assessment of 'double relevance' to the company (see supra, par. 6), further simplifications concern:

– reduction of disclosure obligations (-40%),
– reduction of data points mandatory (-50%) and extension of the voluntary ones,
– gradual introduction of certain obligations. Firms with fewer than 750 employees can omit GHG emissions data and information on the 'own workforce' standard for the first year, further standards (e.g. biodiversity, affected communities, consumers) until the second year. All companies can omit information on financial effects related to non-climate environmental issues and some elements of information on own workforce in the first year.

8) Political scrutiny

The ESRS Delegated Regulation (European Sustainability Reporting Standard) adopted by the European Commission on 31 July 2023 will be formally forwarded to the European Parliament and the Council, in the second half of August, for political scrutiny. Within a period of two months, which can be extended by another two, the European Parliament or the Council will be able to express the power to veto the delegated act, but cannot modify it. (6)

Dario Dongo and Alessandra Mei


(1) Delegated Regulation of the Commission of 31.7.23 che supplements Directive 2013/34/EU of the European Parliament and of the Council with regard to sustainability reporting principles  https://eur-lex.europa.eu/legal-content/IT/TXT/HTML/?uri=PI_COM:C(2023)5303

(2) Directive (EU) 2022/2464 of the European Parliament and of the Council amending regulation (EU) n. 537/2014, directive 2004/109/EC, directive 2006/43/EC and directive 2013/34/EU as regards corporate sustainability reporting https://eur-lex.europa.eu/legal-content/IT/TXT/?uri=CELEX%3A32022L2464

(3) Directive 2014/95/EU, amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups https://tinyurl.com/pa64v2x2

(4) Dario Dongo, Alessandra Mei. CSR, European Sustainability Reporting Standard. The new obligations for businesses. GIFT (Great Italian Food Trade).

(5) ESRS 1, Annex 1, chapters 1,3

(6) European Commission. Questions and Answers on the Adoption of European Sustainability Reporting Standards. https://tinyurl.com/2s386awk 31.7.23

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Dario Dongo, lawyer and journalist, PhD in international food law, founder of WIISE (FARE - GIFT - Food Times) and Égalité.

Alessandra Mei
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Graduated in Law from the University of Bologna, she attended the Master in Food Law at the same University. You participate in the WIISE srl benefit team by dedicating yourself to European and international research and innovation projects.

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